The Federal Reserve’s emergency lending during the financial crisis spanned the global economy, from the largest U.S. financial firms to community banks, hedge funds and a fast-food company.
The Fed, in compliance with orders from Congress, today named recipients of $3.3 trillion in emergency aid. Among them were U.S. branches of overseas banks, including Switzerland’s UBS AG; corporations such as General Electric Co. and McDonald’s Corp.; and investors like Pacific Investment Management Co. and computer executive Michael Dell.
Lawmakers demanded disclosure, over the Fed’s initial objections, as U.S. central bankers pushed beyond their traditional role of backstopping banks to stem the worst financial panic since the Great Depression. The Fed posted the data on its website to comply with a provision in July’s Dodd-Frank law overhauling financial regulation.
“Perhaps most surprising is the huge sum that went to bail out foreign private banks and corporations,” Senator Bernard Sanders, the Vermont Independent who wrote the provision on Fed disclosure, said in a statement today. “As a result of this disclosure, other members of Congress and I will be taking a very extensive look at all aspects of how the Federal Reserve functions.”
The release will heighten political scrutiny of the central bank already at its most intense in three decades. The Fed’s Nov. 3 decision to add $600 billion of monetary stimulus has sparked a backlash from top Republicans in Congress, who said in a Nov. 17 letter to Chairman Ben S. Bernanke that the action risks inflation and asset-price bubbles.
“We owe an accounting to the American people of who we have lent money to,” Richmond Fed President Jeffrey Lacker said today in an interview on Bloomberg Radio’s “The Hays Advantage,” with Kathleen Hays. “It is a good step toward broader transparency.”
The information, which also includes the amounts of transactions and interest rates charged, spans six loan programs as well as currency swaps with other central banks, purchases of mortgage-backed securities and the rescues of Bear Stearns Cos. and American International Group Inc.
The U.S. subsidiaries of European financial institutions, led by Zurich-based UBS and Brussels-based Dexia SA, were some of the largest users of a Fed program providing emergency short-term funding to companies. The biggest U.S.-based user was bailed-out insurer American International Group Inc., at $60.2 billion.
Another program aimed at banks, the Term Auction Facility, helped New York units of non-U.S. firms. For example, Munich- based Bayerische Landesbank borrowed $7 billion in December 2008, while Seoul-based Shinhan Financial Group Co. used $100 million in February 2010.
The data detail the breadth of central bank support that reached beyond banks to companies such as GE, which accessed a Fed program 12 times for a total of $16 billion in commercial paper. The Fed bought short-term IOUs from corporations, risky assets from Bear Stearns and more than $1 trillion in U.S. housing debt.
“Consistent with what we said at the time, we participated in the program to support investors’ need for liquidity during the financial crisis and to manage the company’s commercial-paper maturity profile,” said Russell Wilkerson, a GE spokesman.
Companies’ participation in the programs “reflected the severe market disruptions during the financial crisis and generally did not reflect participants’ financial weakness,” the Fed said today in a statement in Washington. “The Federal Reserve followed sound risk-management practices in administering all of these programs” and incurred no credit losses, the statement said.
At Goldman Sachs Group Inc., Wall Street’s most profitable securities firm, borrowing from the Primary Dealer Credit Facility peaked at $24 billion in October 2008. “Without question, direct government support was critical in stabilizing the financial system, and we benefitted from it,” Chief Executive Officer Lloyd Blankfein said in January 2010.
Michael DuVally, a Goldman Sachs spokesman in New York, said today that the Fed’s actions “were very successful.”
Bernanke pushed the boundaries of the Fed’s powers, using section 13(3) of the Federal Reserve Act, which allowed the central bank to aid non-banks under “unusual and exigent circumstances.” In some facilities, the Fed engaged in non-recourse lending, meaning it loaned against collateral alone and took a greater risk of loss.
The presence of foreign banks in the program underscores the squeeze in dollar liquidity after the collapse of Lehman Brothers Holdings Inc. on Sept. 15, 2008. UBS, Switzerland’s largest bank, was the biggest borrower from the Commercial Paper Funding Facility, tapping the program 11 times for borrowings that peaked at $37.2 billion.
The Fed determined that McDonald’s, while not listed as a borrower under the CPFF, benefited from the program as a “parent/sponsor” of Golden Funding Corp., which sold a total of $203.5 million in commercial paper.
The designation is incorrect, McDonald’s spokeswoman Heidi Barker Sa Shekhem said in a statement. “McDonald’s Corp. was erroneously listed by the Federal Reserve Bank as a recipient of federal funds during the financial crisis of 2008,” she said.
The emergency programs included the Term Asset-Backed Securities Loan Facility, which has supported billions of dollars in credit to small businesses, credit card borrowers, and students, and the Term Auction Facility, which helped banks get cheaper funding.
Pimco, the world’s largest bond fund, tapped the TALF 96 times between April 2009 and March 2010 for a total of $7.25 billion, making the Newport Beach, California-based firm one of the largest borrowers under the program, which was different from most of the others in that the Fed had to entice firms to participate. Dell’s MSD Capital LP was among investors that included hedge funds and pension plans, according to the data.
In the TAF, Bank of America had loans for $45 billion outstanding from the facility as of Jan. 15, 2009, while Wells Fargo had loans for $45 billion on Feb. 26, putting them at the top of the borrowers’ list.
Congress excluded one Fed lending program from disclosure, the discount window, which is the subject of a 2008 lawsuit filed by Bloomberg LP, parent of Bloomberg News, against the central bank. A group of banks is appealing to the Supreme Court over lower-court decisions ordering the Fed to identify loan recipients. The program peaked at $110.7 billion in October 2008.
Force the Fed
Sanders said he was motivated to use legislation to force the Fed to reveal borrowers after Bernanke rebuffed his request to identify the firms.
“Given the size of these commitments, it is incomprehensible that the American people have not received specific details about them,” Sanders said in a letter to Bernanke on Feb. 4, 2009.
“The Federal Reserve does not release specific information regarding the borrowings of individual institutions from our lending facilities,” Bernanke said in a reply to Sanders. “The approach is completely consistent with the long-standing practice of central banks.”
A year after his 2009 correspondence with Sanders, Bernanke said in House Financial Services Committee testimony the Fed would agree to reveal the names of borrowers of emergency facilities with a “sufficiently long” lag. Once again, he said that the confidentiality of the discount window “must be maintained.”
Today’s information relates to aid from Dec. 1, 2007, through July 21, 2010, when President Barack Obama signed Dodd-Frank into law. The act also requires the Fed, after a two-year delay, to identify firms that, following the law’s passage, borrow through its discount window and participate in its purchases or sales of assets such as mortgage-backed securities and Treasuries.
The Dodd-Frank legislation has also limited the Fed’s emergency lending powers from now on to programs with broad-based eligibility, curtailing bailouts of individual institutions.
“You have to balance the different considerations,” said Roberto Perli, managing director at International Strategy & Investment Group in Washington and a former Fed Board staff member. “They crossed a line, but what would have been the alternative? You can’t have a huge run on money funds. The situation was very delicate. The alternative would have been a lot worse.”